The recent event in the German Capital markets auctions for T-Bonds is the last sign of the critical liquidity problems that Europe is suffering. Being the ECB the main actor of this distortion, our final interest is to know if we can predict the behavior of the European Central Bank with the final aim to protect our Equity Stock and or increase it accordingly.

The word Cabal has two main meanings (click for definition) and being generous and avoiding any paranoia let’s take the lesser evil of both as a framework:

– A cabal is a group of people united in some close design together, usually to promote their private views and/or interests in a church, state, or other community, often by intrigue, sub rosa … sometimes composed of a few designing persons, and at other times are manifestations of emergent behavior in society or governance on the part of a community of persons who have well established public affiliation or kinship.

Recent changes of governments in Portugal, Greece, Italy and Spain have been certainly affected by the policy of the ECB. The idea that his invisible hand is behind some crisis in Europe trying to force major structural reforms is a clear uncomfortable truth. No bank in the Eurozone has a safe strategy without clearing first this crucial issue.

To follow ECB rulers we can check their results as Money Makers tracking the parameter M2 and comparing it with the USA data. In that sense we will start in 2000 dividing the period in three parts. As the ECB speakers usually argue that their main is inflation (even when by law it is not the only one) we will also use that parameter for the Eurozone.

From Jan 2000 to Dec 2004:

That was the times of Greenspan in the FED and the beginning of the last phase of the current Long Cycle where the Dot-Com Bubble burst, with his rates reduction, the Bush Fiscal Expansion (that in part still persists today) and all the expansive actions, including WWT, that you all know very well. So, what did the ECB did with their new established currency? Well, see chart below:

The ECB practically just followed a very similar track to the FED increasing the M2 almost 40% while the inflation rate stayed at reasonable levels. The Bad guy was Greenspan while the ECB directory was the “tough” ones. Oh, really?!

The discussion at that time in the USA was: “not to stop stimulus too soon as the Japanese did”, while just a few warm that a monstrous bubble was being incubated.

From Jan 2005 to Dec 2008:

This is the period were Greenspan passes the “stick” to Bernanke and where the real bubbles grew and busted. What is surprising, even to the supposedly well informed European people, is that the monetary expansion in Europe was immensely larger than is the USA: the “tough” monetary guys of the ECB beat the Helicopter-Bernanke! You can see that in the chart below where, as Germany and France needed more time to “recover”, M2 in the Eurozone grew 52pp while in the USA it did it “just” 30pp!

In both areas they avoided (temporally) Deflation and a Japanese economic disease expanding the quantity of money, but made the same mistakes than Japan in other areas as we commented in a previous post.

Both heated their respective Economies and created bubbles everywhere, mainly in the Irish and Spanish real state (see chart for Spanish Bubble), in the Portuguese and Greek Public Sector and, of course in the Stock Markets … till in September 2.008 Lehman declared the biggest bankruptcy of the USA history. And then came the Opus Magna of the ECB-EU Cabal.

From Ag 2008 to Sept 2011:

With the Economy of both areas in to Deflation and bordering the total collapse, the FED launched the QE series and the Federal Government the TARP and Fiscal Expansion Plans while here the ECB reduced the interest rate and the EU rulers basically let the Economy to stabilize itself, so the system in Europe started to destroy Money and Credit Supply .

The Expansion of France and Germany together with the Global Economy brought inflation via commodities till the cycle got exhausted around may 2.011, when we warm on a future recession .

While the USA System in general recovered, even when still has several areas of serious concern, in Europe Greece, Portugal, Ireland (see link on what the ECB has done to them), Spain, Italy, now Belgium (France will suffer something similar en 2012, as I warm you in July 2011) and the fruits of that policy (red circle) are now affecting Germany that is on the brink of illiquidity. These evident mistakes forced the QE of the ECB and subsequent the high growth of bank reserves (similar to the first QE) demonstrated that ECB Policy was breaking the balances of the European financial Institutions.

As you can see in the chart above the M2 of USA grew much faster in this period and they have practically no liquidity problems while inflation, even when high is moderating as the economy slows, is very similar in both areas and all this happened because the Directory that rules the Euro-system made it dysfunctional. The good part is that their behavior is predictable and any bank should consider it in their strategy either to avoid economic problem or making tones of profits hedging them; that is why in the next paper we will learn how to track their messages.

This “Cabal” is like the weather but either you are a country of the Euro, a bank, a firm or an individual there is a strategy to be free of their actions.

[…] the head of the disaster will be removed and all indicates that another pure representative of the ECB Cabal, the Masters of the Crisis, will be in charge of the of the Bank of Spain promising they will pursuit in the same wrong path […]